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TheStreet Open House

Moody's Sees Thorny AT&T Deal with DIRECTV

NEW YORK (TheStreet) - Rating agency Moody's said on Tuesday it believes AT&T (T - Get Report) will face a tougher review process in its efforts to buy DIRECTV (DTV - Get Report), when compared to Comcast's (CMCSA - Get Report) controversial merger attempt with Time Warner Cable (TWC - Get Report). Still, Moody's believes the odds are both mega-deals will pass regulatory reviews.

>> Read More: How to Read an AT&T and DIRECTV Merger

In a ratings note, Moody's said it sees a 75% likelihood AT&T receives regulatory approval for its merger effort with DIRECTV, whereas Comcast's odds of success in buying Time Warner Cable are greater than 90%.

That may sound bizarre to the ordinary cable customer.

Comcast and Time Warner Cable are the two biggest cable and Internet service providers in the U.S, whereas AT&T is a telecom giant and DIRECTV is a market leader in satellite TV in the U.S. and Latin America. The hitch is that Comcast and Time Warner Cable don't overlap in any of their respective markets, while AT&T's U-verse offering overlaps with DIRECTV in about 25% of the country.

That overlap isn't expected to be a dealbreaker. AT&T has offered to set prices for DIRECTV at an equivalent national package for three years, while freezing U-verse broadband prices for three years, potentially diffusing pushback from regulators. AT&T also has committed to building out service for 15 million homes in rural and underserved markets as a means to placate regulators.

If Moody's is confident AT&T will ultimately win DIRECTV, the ratings agency is less than sold on the merits of the deal. "AT&T's DIRECTV acquisition lacks strategic clarity," Moody's said in a note that put the telecom giant for a review for a downgrade from its A3 rating.

In a telephone interview, Neil Begley, a senior vice president at Moody's said AT&T's acquisition of DIRECTV may help alleviate video loads on U-verse, however, the telecom firm will need to continue investing in its wireline footprint if the company wants to expand upon its 25% Internet footprint.

Simply put, AT&T's wireline network and DIRECTV's satellite network can't be physically integrated in the same manner as Comcast and Time Warner Cable. That means AT&T's network will require more investment, especially since the company will need to replace its copper-wire infrastructure if it wants to remain competitive.

Once investors factor in those costs, in addition to the $48.5 billion pricetag for DIRECTV, the deal may come off as burdensome to shareholders. DIRECTV comes with significant debt, and the stock component of AT&T's offer effectively means it will be spending added cash flow on dividend payments.

Even if AT&T meets its $1.6 billion guidance of deal-related synergies, Begley, the Moody's SVP, questions whether DIRECTV will increase the company's free cash flow enough to handle a debt load that would approach $100 billion.

>>Read More: Warren Buffett's Top Lieutenants Eye Malone's Liberty Global

>> Read More: Liberty Global: The Safe Way to Play Netflix Expansion

>> Read More: Verizon Playing Defense In $130 Billion Deal

-- Written by Antoine Gara in New York.

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